AllianceDAO 2024 Startup Research Report: 2/3 of startups are building on Ethereum, still focusing on infrastructure

Unique Title: 2024 Crypto Startup Trends Report

Unique Supply: AllianceDAO

Unique Compilation: Zen, PANews

AllianceDAO is a number one crypto accelerator and founder group, attracting one of the best crypto startups within the trade to our accelerator program, receiving over 3,000 functions every year. For the reason that AllianceDAO accelerator program is held twice a 12 months, we report the info in two elements. On this report, Alliance supplies traits noticed from the applying information and provides insights on what these traits could suggest for the broader startup ecosystem.

Key Highlights: Key Tendencies Noticed in Inner Knowledge from 2021-2024:

Blockchain

1. Ethereum stays the first ecosystem for startups (at present about 2/3 of startups are building right here), whereas Solana (at present 18%, which as soon as dropped to eight% after the FTX collapse) and Bitcoin (as we speak 5%) have seen speedy progress over the previous 12 months and a half.

2. Inside the Ethereum ecosystem, 59% of startups are at present building on Optimism Rollup (Optimism, Base, and Arbitrum).

3. Polygon is regularly shedding startups, with Polygon zkEVM lagging behind Optimism Rollup in competitors.

4. Base is the fastest-growing amongst all Ethereum L2s, now accounting for over 28% of startup exercise, having began from zero in only one 12 months.

What verticals are candidates building merchandise in?

1. Rising verticals: Infrastructure, DeFi, Funds, AI mixed with crypto.

2. Declining verticals: DAO and NFT.

The place are the founders positioned?

1. Europe (31%), america and Canada (29%), and Asia (27%) are at present the highest three areas the place startups are being constructed.

2. Nonetheless, the proportion of startups from america and Canada has steadily declined in current rounds, whereas the proportion from Asia and Africa is on the rise.

Key phrases more and more talked about by venture groups

In style phrases which have grown previously 12 months embody Totally Homomorphic Encryption (FHE), Chain Abstraction, meme, SocialFi, prediction markets, liquid staking, restaking, RWA, stablecoins, L1, L2, and L3.

Founder Background & Group Composition

1. Presently, 30% of founders making use of to our accelerator have expertise in huge tech (S&P 500), and 12% of founders have studied at prime colleges (QS prime 100 universities).

2. 39% of startups are composed of solo founders, and amongst corporations with a number of founders, the proportion of equal fairness distribution reaches 50%.

3. 72% of startups function utterly remotely (with no staff working on-site).

Beneath is the principle textual content of the report

Layer1: Ethereum Dominates, Solana and Bitcoin Ecosystems Present Promise

Ethereum stays the dominant ecosystem, attracting 62% of crypto startups making use of to Alliance. Moreover, Solana has rebounded to an 18% utility price after hitting a low within the second half of 2022. Curiously, the Bitcoin ecosystem can also be attracting extra builders, now accounting for almost 5% of all functions.

The quantity and high quality of startups building in every ecosystem stay one of the best indicators for predicting the efficiency of that ecosystem within the subsequent 1-2 years. In any case, startups have to construct merchandise, and merchandise finally drive utilization, on-chain metrics, consideration, and value traits.

Solana is at present probably the most momentum-driven ecosystem. In line with our information, the quantity of startups on Solana hit a low within the second half of 2022. This can be instantly associated to the collapse of FTX, as FTX performed a vital function in Solana’s early improvement. Since then, each the worth of SOL and Solana’s on-chain metrics have begun to rebound. Many of the highest merchandise being constructed on Solana have been really established through the bear market and the FTX disaster. Tensor, Kamino, Solflare, and Pump are some of the favored functions constructed on Solana by Alliance alumni. Primarily based on the present traits in startup decisions, we imagine Solana will proceed to draw startups and customers within the subsequent 1-2 years.

In the meantime, the Bitcoin ecosystem is attracting increasingly more startups, beginning with the launch of Ordinals in 2023. The early hype round this non-fungible token normal has sparked numerous experiments with different token requirements like BRC20 and Runes. On the identical time, efforts aimed toward considerably enhancing Bitcoin’s programmability, corresponding to BitVM and dozens of Bitcoin L2 options, have emerged. We are additionally seeing many DeFi initiatives that originated on Ethereum, corresponding to decentralized exchanges, lending platforms, and stablecoins, starting to copy on Bitcoin. Whereas the hype across the Bitcoin ecosystem could peak after the newest halving in April 2024, that is additionally the time in Bitcoin’s historical past when entrepreneurs are most centered.

We are optimistic about Bitcoin’s prospects as a startup ecosystem, as the present wealth saved in Bitcoin exceeds $1 trillion, prompting the market to discover methods to make the most of this wealth in significant or attention-grabbing methods. Nonetheless, we should additionally level out that Ethereum and Solana stay far forward, and Bitcoin’s technical limitations could forestall it from offering a differentiated expertise for builders and customers.

It must be famous that regardless of lately shedding some consideration to Solana and Bitcoin, Ethereum stays probably the most lively ecosystem, capturing almost 2/3 of Alliance candidates’ consideration. Presently, most startups are building merchandise on Ethereum L2 in a extremely aggressive market.

Ethereum Layer 2: Base Emerges, Optimism Rollup Continues to Lead

Within the early historical past of Alliance, startups have been virtually totally building on Polygon. Nonetheless, Optimism Rollup (corresponding to Optimism, Base, and Arbitrum) has persistently gained consideration over the previous three years. At this time, they collectively account for 59% of the startups building on Ethereum L2. Notably, Base was simply launched in 2023 and at present occupies 28% of startup exercise on Ethereum L2.

In line with our personal information and information from L2Beat, Optimism Rollup has confirmed to be a greater product than ZK Rollup. General, Optimism Rollup gives decrease charges and a greater developer expertise, which in flip attracts extra customers and startups. Nonetheless, now we have additionally encountered some excellent founders building infrastructure and functions on ZK Rollup (corresponding to Starknet and ZKSync). If instruments enhance or these founders discover product-market match, ZK Rollup could start to draw extra founders and end-users, however given the present dominance of Optimism Rollup, this stays to be seen.

Polygon has regularly misplaced market share of startups building on Ethereum over the previous three years. Polygon is not only a blockchain, however the overwhelming majority of startup and person exercise happens on Polygon POS, which is an Ethereum sidechain. The decline in market share is comprehensible, as Polygon POS was really the one mature and out there answer for scaling Ethereum a number of years in the past. At this time, Polygon has invested closely in Polygon zkEVM, however it still lags considerably behind Optimism Rollup in comparison with different ZK Rollups.

Lastly, it’s value mentioning Base. We knew a 12 months in the past that Base would change into one of a very powerful L2s, due to Coinbase’s model and distribution capabilities. Nonetheless, they’ve exceeded our expectations, turning into the second-largest vacation spot for Ethereum startups after Polygon.

Vertical Distribution: Infrastructure Continues to Develop, DeFi Stays In style

What merchandise startups are building is one other attention-grabbing development we are able to observe from the applying information. Please word that our makes an attempt to categorize product verticals are inherently subjective and is probably not good. For instance, these classes are not mutually unique and are personalized. A startup can function in each gaming and NFT sectors concurrently. Due to this fact, whereas long-term traits are attention-grabbing, please take these numbers with warning.

The general public impression is that there’s an excessive amount of infrastructure and never sufficient functions, which aligns with our utility information—certainly, the proportion of startups selecting to construct infrastructure has continued to develop over the previous three years.

One of the principle causes for the expansion of infrastructure could also be that traditionally, the valuations of infrastructure tokens have been excessive. This has led extra startups to pursue infrastructure initiatives, whereas extra enterprise capital has flowed into infrastructure, additional driving extra startups. This consequence is a misallocation of a big quantity of information and monetary capital however has additionally resulted in additional scalable blockchains, which ought to profit future utility builders.

In the meantime, DeFi has change into one of the preferred classes over the previous 12 months. Regardless of many enterprise capitalists believing that “DeFi is lifeless,” the quantity of DeFi startups has really elevated over the previous 18 months. Nonetheless, DAO and NFT stay the least common product classes. We imagine this is smart, as many DeFi initiatives have skilled loss of life in NFTs (many DAOs deal with their NFTs as governance tokens), and the worth of NFTs themselves appears unable to kind out there.

Nonetheless, NFTs still entice some very attention-grabbing startups, particularly within the artwork sector, and we imagine this affect will proceed. We predict that future startups will focus on offering infrastructure for extra functions and merchandise, corresponding to SocialFi, Web3 gaming, and on-chain information aggregation, which is able to additional drive the sustainability of the Web3 ecosystem.

Geographic Distribution: Eurasia Rises, North American Benefit Weakens

One of probably the most attention-grabbing traits we analyzed is the first geographic distribution of startup founders.

Within the first half of 2024, we noticed the proportion of founders from america and Canada drop to a historic low of solely 29%. This proportion has decreased in comparison with the second half of 2021, when candidates from america and Canada exceeded 45%.

In the meantime, the proportion of startups from Asia and Africa has reached historic highs, at 26% and 5%, respectively. General, North America, Europe, and Asia still dominate, with the proportion of startup functions from every area ranging between 25% and 33%. The lower in U.S. candidates is a regarding development, which can be attributable to two causes. First, the growing regulatory uncertainty within the U.S. and the “enforcement regulation” methods taken by the SEC, CFTC, and the U.S. Treasury have led U.S. founders to relocate abroad or shift to different industries (corresponding to AI). Second, the real-world adoption of cryptocurrencies in growing nations is steadily rising, particularly the use of stablecoins as a hedge in opposition to native fiat currencies and as a kind of cross-border and censorship-resistant funds. This additional attracts extra startups from these areas.

Whether or not the primary development will proceed stays to be seen, particularly if the upcoming November elections result in a brand new authorities. Nonetheless, the second development is unlikely to decelerate within the brief time period, as stablecoins are certainly addressing actual issues for on a regular basis folks in growing nations. That is significantly necessary, as public and social media-driven discussions usually heart across the U.S., viewing cryptocurrencies merely as instruments for hypothesis. Whereas hypothesis has pushed cryptocurrency adoption within the World North, within the World South, stablecoins are driving the recognition of cryptocurrencies.

In style Phrases Amongst Startups: Totally Homomorphic Encryption, Chain Abstraction, Meme

The cryptocurrency area has gone by a number of hype cycles, sometimes each 4 years. Nonetheless, inside every cycle, numerous product areas have additionally skilled a number of smaller hype cycles.

By analyzing the key phrases talked about in Alliance functions, we achieve insights into the traits common throughout a selected interval. We refer to those key phrases as “crypto buzzwords” and categorize them for a extra detailed visualization of their traits. Please word that every one charts on this part are on a logarithmic scale. Zero-Data Proofs (ZK), Totally Homomorphic Encryption (FHE), Trusted Execution Environments (TEE), and Multi-Social gathering Computation (MPC) are some key privacy-related applied sciences utilized in crypto. Notably, whereas ZK can be utilized for privateness safety (e.g., in Zcash and Twister Money), its present major utility is scalability.

Privateness

ZK has remained probably the most talked about time period for a interval. FHE has seen a rise over the previous 12 months. This information aligns with the traits we see in public discourse. The primary utility of ZK in crypto was Zcash in 2016. Nonetheless, it solely turned a family identify in 2021. In truth, in 2021, Vitalik wrote: “Optimistic rollups are prone to win on the whole EVM computation, however within the medium to long run, ZK rollups will win in all use circumstances.” In our view, the constant rise of ZK from 2021 to 2023 could be traced again to this single occasion.

Person Expertise

The point out of “bridging” has remained comparatively steady over the previous three years. In the meantime, “account abstraction” noticed a big rise within the second half of 2021, whereas “chain abstraction” quickly grew in 2022. Mentions of “intent-based” have lately surged however appear to have peaked. “Chain abstraction” is actually a renaming of cross-chain bridging. Due to this fact, its rise is said to the stagnation of “bridging.” In the meantime, the emergence of “account abstraction” is said to EIP-4337, which Vitalik popularized in 2021. Many crypto buzzwords could be traced again to the founders of Ethereum.

Client Functions

Within the shopper functions and gaming sectors, “NFT,” “metaverse,” and “GameFi” peaked within the second half of 2022 after which sharply declined. “X to earn” additionally skilled an analogous downward development, though the decline was smaller. “SocialFi” and “meme” are some new phrases that emerged in 2021 and proceed to indicate progress.

The speculative frenzy round NFTs in 2022 has probably been changed by memecoins, because the latter has decrease unit costs and better liquidity on account of their fungibility. “X to earn” and “GameFi” peaked underneath the affect of Axie Infinity, however surprisingly, the decline of “X to earn” has not been vital. Lastly, “SocialFi” has revived within the second half of 2023, probably associated to the success of Buddy.tech.

Yield

“Liquid staking” has been gaining consideration since 2021, whereas “restaking” has been steadily rising since 2022. However, mentions of “lending” have remained comparatively steady over time, though they peaked within the second half of 2022.

Buying and selling

“Automated Market Makers” (AMM), “derivatives,” and “decentralized exchanges” (DEX) have usually proven an upward development over the previous three and a half years. In distinction, “Most Extractable Worth” (MEV) peaked within the second half of 2022 and has since misplaced reputation amongst entrepreneurs. Launchpads regained momentum after a slight slowdown in 2023. General, trading-related key phrases are on the rise, as that is one of the few functions in crypto with clear product-market match. The current rise of “launchpad” could also be associated to the success of Alliance alumni Pump.enjoyable.

RWA

Startups making use of to Alliance have proven a steady rise in mentions of “funds,” “stablecoins,” and “RWA.” As talked about earlier, stablecoin-based funds are among the many few functions in crypto which have demonstrated product-market match, particularly in rising markets.

Scalability

Within the scalability area, “L2” and “L3” present robust progress traits, whereas “L1” started to stagnate after peaking within the second half of 2022. For the reason that second half of 2021, new buzzwords have emerged, together with “information availability,” “appchain,” and “sidechains.”

The efforts made in blockchain scalability, significantly within the case of Ethereum, have more and more leaned in the direction of modularity in recent times. Vertically, we are regularly advancing in the direction of L2 and L3 layers and increasing downwards to devoted information availability layers. Horizontally, increasingly more appchains are rising. Lastly, the rise of “sidechains” on this information is comparatively stunning, maybe associated to the success of Polygon and Ronin.

Founder Background & Group Composition

Founder Background: The Most Profitable Founders Not often Have Elite Backgrounds

In our newest spherical of functions, about 30% of candidates reported having expertise at giant tech corporations (word: we outline “giant tech corporations” as these within the S&P 500). This proportion has remained comparatively steady since 2022; nevertheless, in comparison with 2021, when almost 50% of candidates got here from giant tech corporations, this quantity has considerably decreased.

Why the lower? This can be associated to the discount of U.S. candidates on account of regulatory points (and the U.S. is dwelling to giant tech corporations). Moreover, the bull market in 2021 resembled a “gold rush,” attracting many people from non-crypto fields into the crypto trade, making an attempt to revenue from it. Lastly, in 2024, curiosity in cryptocurrencies amongst tech employees could also be quickly shifting to different industries like AI. In truth, over the last bull market, we noticed a number of Alliance startups pivot to AI.

Furthermore, amongst our candidates, the proportion of founders who graduated from “prime colleges” (QS prime 100 universities) peaked in 2021 and has remained steady since then. The development of prime colleges has been remarkably just like that of giant tech corporations over the previous few years, remaining comparatively unchanged, so there is not a lot development value discussing.

However are founders from elite instructional {and professional} backgrounds extra prone to succeed?

Should you have a look at a pattern of all founders within the crypto area, it’s evident that there’s a correlation between attending prime colleges or working at giant tech corporations and future success. Nonetheless, once we observe probably the most profitable corporations amongst these we speed up and probably the most profitable corporations in the complete crypto trade, only a few come from elite backgrounds.

We focus on potential causes for this in “What Does It Take to Be a Nice Crypto Founder?” In brief, cryptocurrency is an counterintuitive expertise, and plenty of founders from conventional elite backgrounds could battle to grasp it from first rules. Whereas this case could change over time, this angle still holds true for now.

Group Composition and Work Mode: Practically 75% Totally Distant

Analyzing the staff composition in our information may also help us perceive the construction of crypto startups. Whereas this doesn’t essentially reveal which composition will yield probably the most profitable groups, we share what we imagine to be the best scenario based mostly on expertise.

In our newest spherical of functions, 39% of startups have been based by solo founders. Traditionally, solo founders have confronted bias from enterprise capitalists; nevertheless, information exhibits they’ll obtain extraordinary outcomes: analysis has discovered that about 20% of unicorn corporations are based by solo founders. Moreover, they usually have key staff who is probably not known as co-founders however still have vital impression in sure circumstances.

Amongst startups with two or extra co-founders, about half (45%) have fairness distributed equally, whereas the opposite half don’t. When fairness distribution is unequal, startups with precisely two founders are more than likely to be allotted in a 60-40 or related ratio, corresponding to 51-49, adopted by 70-30.

In startups with three or extra founders, we observe that just about any kind of fairness distribution is suitable; nevertheless, equal distribution or a single founder holding the bulk of fairness (≥50%) is the most typical situation. The principle causes for unequal fairness distribution amongst founders are to reward those that i) initially funded the startup with private capital; ii) contributed the concept (together with effort and contributions); or iii) maintain probably the most decision-making energy.

We don’t have robust opinions on this, however for founders who begin their ventures across the identical time, we have a tendency to advise them to distribute fairness equally, as profitable entrepreneurship is a decade-long journey, though it’s comprehensible that equal distribution just isn’t all the time affordable in sure circumstances, as talked about above.

Our information signifies that as we speak, almost 75% of startups absolutely undertake a distant work mannequin (i.e., no staff working on-site). This proportion is kind of vital total, though it isn’t stunning given the worldwide nature and relative scale of the crypto trade.

The COVID-19 pandemic could have modified the way in which we work, however at Alliance, we desire face-to-face groups or no less than co-working co-founders and key staff. In-person staff communication is extra environment friendly and quicker, which in flip fosters a stronger staff tradition, creativity, and accountability.